CM(2007)78 addendum 1 18 May 20071
999bis Meeting, 20 June 2007
10 Legal questions
10.3 European Committee on Legal Co-operation (CDCJ) -
Draft Explanatory Memorandum to Recommendation Rec (…) of the Committee of Ministers to member states on legal solutions to debt problems
Item to be considered by the GR-J at its meting on 12.06.2007
1. In many European countries, the significance of credit has increased over the past few decades. Lending drives economic growth and benefits individuals. As a matter of fact, the availability of sufficient credit is a central element in a functioning market economy.
2. Nevertheless, in some circumstances the growth in lending can lead to serious financial difficulties for individuals and families. In the member states of the Council of Europe over-indebtedness of individuals and families caused by, for instance, increased marketing of and easy access to credit, over-commitment of the consumers and unforeseen events that have weakened their economic situation (unemployment, sickness, change of family situation etc.) has become an increasingly widespread phenomenon.
3. Furthermore, the practices of aggressive credit marketing, making use of the latest information technologies, touch all levels of society, especially those who are most vulnerable.
4. Of particular importance is the position of young debtors, the newly emerging market segment who are particularly susceptible to aggressive credit marketing techniques. Over-indebtedness of young people can pose a serious and long-lasting threat to the economies of member states and the well-being of society in general.
5. Governments of member states play an important role in preventing and controlling over-indebtedness not only through specific measures dealing with debt problems but also by ensuring that social and economic policies do not jeopardise the financial situation of individuals and families.
6. Due to its complex nature, over-indebtedness may lead to social, health and legal problems for individuals and families and may put children’s basic needs at risk. Therefore, legal and political solutions to over-indebtedness should be combined with a broader range of social and financial measures implemented in different areas of society, aiming at combating poverty and financial illiteracy and promoting social inclusion, while paying great attention to human rights and dignity.
7. In a credit society it is impossible to prevent all debt problems at all times but legal, political and practical measures for limiting, as far as possible, over-indebtedness and its effects should be examined and the best of these measures identified with a view to assisting the member states in their implementation.
8. Currently there is no international legal instrument dealing specifically with over-indebtedness. It is hoped that the present Recommendation, setting out minimum legal standards for dealing with debt problems, could form a sound basis for member states wishing to set up a more comprehensive legal instrument on this topic in the future.
9. Nevertheless, at the level of the European Union there are several legal instruments dealing with certain aspects connected to over-indebtedness, such as, for instance, enforcement of judgments in civil and commercial matters2, legal recognition of foreign bankruptcy proceedings3, legal framework for consumer credit activity4, information to be supplied to the consumer before a credit agreement is concluded and the principle of responsible lending5.
10 Without doubt, such an important subject falls within the realm of activities of the Council of Europe. Up to now only a few aspects indirectly relating to over-indebtedness have been covered by legal instruments adopted under the aegis of the Council of Europe. These instruments cover, for instance, the protection of personal data6, the effective enforcement of judgments7 and the need to strike a balance between the interests of the debtor and those of the creditor as well as protecting the essential assets of the debtor and providing the possibility of protecting part of his/her income8 from the enforcement procedure (garnishment) and certain aspects of collective insolvency proceedings9.
11. Therefore, there is the need to address the problem of over-indebtedness of individuals and families in a comprehensive manner. The Council of Europe is well placed to continue playing an important role in assisting member states to best deal with problems of over-indebtedness through broad intergovernmental co-operation.
12. In this respect, the European Committee for Social Cohesion (CDCS) has set up a “Dialogue platform on ethical and solidarity-based initiatives”10, which is a constructive forum for producing new ideas and setting up alternative initiatives to combat poverty and social exclusion and factors leading to these phenomena, including over-indebtedness.
13. In addition to the social and educational solutions to debt problems, their legal aspects should also be taken into account. At their 26th Conference (Helsinki, 7-8 April 2005), the European Ministers of Justice carried out a detailed examination of the issue of over-indebtedness in Council of Europe member states and highlighted the need to identify possible legal and practical solutions that the authorities could bring into play when dealing with this problem. The Ministers adopted Resolution N° 1 on Seeking Legal Solutions to Debt Problems in a Credit Society, whereby they invited the Committee of Ministers of the Council of Europe to entrust the European Committee on Legal Co-operation (CDCJ) with analysing existing legislation and good practices, identifying the difficulties met and preparing an appropriate instrument defining legislative and administrative measures for dealing with the problem of over-indebtedness.
14. As a follow up to the above Resolution an expert, commissioned by the CDCJ, prepared a “Report on legal solutions to debt problems in credit societies”. In this Report existing legislation and good practices were analysed and difficulties in finding solutions to debt problems were identified. The Report discussed the concept of over-indebtedness, the prevention of over-indebtedness, the alleviation of the payments of debts and the rehabilitation of over-indebted individuals and families, and served as a basis for the structure of this Recommendation.
15. Within the framework of its contribution to the implementation of Resolution N° 1 of the 26th Conference of the European Ministers of Justice, the Committee of Ministers adopted, on 11 January 2006, the Terms of Reference of the Group of Specialists on Seeking Legal Solutions to Debt Problems (CJ-S-DEBT), instructing it to prepare, under the authority of the CDCJ, an appropriate instrument defining legislative and administrative measures as well as to consider remedies to prevent and solve debt problems.
II. Scope of the Recommendation
16. To facilitate implementing this Recommendation a non-exhaustive definition of over-indebtedness is proposed. Over-indebtedness should cover at least the situations where the debt burden of an individual or a family continuously and/or manifestly exceeds its payment capacity, resulting in systematic difficulties, and sometimes in failure, in paying the creditors11. Member states are encouraged to consider a more precise definition of over-indebtedness to apply within the framework of their legal systems.
17. At the same time the distinctions between the concepts of over-indebtedness, poverty and consumer insolvency should also be taken into consideration, noting however that all three phenomena may lead to social and health problems and exclusion of individuals and families from society.
18. There are three principal complementary ways through which debt problems can and should be dealt with: prevention of over-indebtedness, alleviation of the effects of the recovery of debts and rehabilitation of over-indebted individuals and families.
19. The Recommendation aims at identifying possible legal and political measures that can be applied by the states in order to prevent over-indebtedness of individuals and families, to adjust the recovery of debts from the over-indebted in a manner that avoids their social and financial exclusion and to facilitate rehabilitation of the over-indebted with due regard to their human dignity.
20. The Recommendation also considers the role and co-operation of competent bodies at international, national, regional and local level, such as courts, administrative authorities, non-governmental organisations involved, as well as financial and lending institutions.
III. Commentary on specific provisions
Prevention of over-indebtedness
21. To deal successfully with the problems that over-indebted individuals and families encounter it is necessary to have a regularly updated overall picture of the extent and characteristics of over-indebtedness in member states. The collection of statistics and other information on debt problems12 and the analysis of the situation of over-indebted individuals and families is an indispensable prerequisite for obtaining a complete picture and for monitoring the effects of the measures undertaken. That is why authorities are recommended to collect and use this information systematically so that they are able to keep track of all the developments and anticipate potential difficulties by taking necessary measures in advance.
22. Introducing financial literacy and budget management as part of national education is important for individuals and families to cope with the financial aspects of their lives in general and can be a very efficient tool to ensure that they have the minimum knowledge necessary in order to make informed choices when considering credit proposals offered by the market, thus promoting responsible borrowing and preventing over-indebtedness.
23. In order for access to financial, social and legal advice and counselling to be effective it should not only be available free of charge (or at low cost), but also physical access to such advice and counselling should be uncomplicated and this advice and counselling should be impartial13.
24. Due to objective reasons, lending institutions are best placed to assess the repayment ability of a potential consumer. This is why these institutions should be encouraged to take their part of responsibility when offering credit, especially to young people. A legal framework, effectively preventing inconsiderate or even predatory lending, as well as misleading or aggressive advertising14 should be set up, ensuring that lending institutions establish certain criteria that should be applied before the credit is granted. This framework could envisage, inter alia, the temporary exclusion from access to credit of over-indebted individuals and families in respect of whom a specific debt-related procedure has been initiated. Furthermore, the responsibility of banks and lending institutions does not start, nor does it end at the stage of granting a credit. Marketing of credit and the use of credit data by lending institutions are also activities that have direct influence on credit consumers’ behaviour and their well-being. Establishing appropriate regulations, such as, for instance, codes of conduct for the banks, as well as responsible practices during all phases of the credit relationship could significantly contribute to preventing over-indebtedness of individuals and families. Member states should encourage creditors to act in the interests of the general body of creditors and those of the debtor.
25. Guarantors are one of the possible players in a credit relationship. When the debtor fails to meet his/her financial obligations it is the guarantor’s financial interests that are at stake. It is necessary to ensure that guarantors are informed of the situation concerning the debtor’s repayment abilities, especially in the case of a change of circumstances. Mechanisms should be introduced that would protect the guarantors and prevent abuse of the guarantees.
Alleviation of the effects of the recovery of debts
26. An efficient enforcement system is one of the key elements of effective access to justice. With regard to the credit relationship it is important to stress the right of creditors to have their legitimate financial interests protected, where necessary, through the enforcement of court decisions15. However, in the case of over-indebted individuals and families the law should clearly delimit the powers of enforcement agents when enforcing a decision against such individuals and families.
27. When enforcing a decision of a judicial authority, as well as carrying out extra-judicial debt collection, the debtors’ rights and human dignity16 should be duly safeguarded. Equal dignity of all human beings was confirmed to be one of the common values of the Council of Europe member states17 and should therefore be protected at all stages of debt enforcement without infringing the legitimate interests of creditors.
28. Over-indebtedness may have a strongly adverse impact on the development of children in over-indebted families. It may not only reduce the capacity of adult members of the family to re-engage in an income-generating activity but, inter alia, can also prevent or substantially limit the same capacity for their children. Therefore debt recovery procedures should protect the essential assets of the debtor by means of, for instance, garnishment of a part of income in order to ensure that a fair balance is struck between the basic living needs of the debtor and his or her family and the efficiency of debt repayment.
29. Although the guarantors voluntarily take the risk of having to pay the creditors if the debtor fails to do so, their interests also need a certain degree of protection. At the very least debt enforcement should avoid leading to over-indebtedness of the guarantor. The right to similar treatment for guarantors, including, as far as possible, the right to treatment similar to that of the debtor, should be taken into consideration at all stages of debt enforcement. Guarantors should have appropriate legal remedies to safeguard their position and to protect their interests in debt-related proceedings18.
30. The rapid development of the international credit market has opened possibilities for obtaining credit in foreign countries. An increased risk of over-indebtedness arising from the possibility of easily obtaining a transfrontier credit by means of the latest information technologies should be borne in mind19. In any case, it is important that member states facilitate recognition and, where applicable, enforcement of decisions concerning payment judgments and payment plans emanating from competent foreign authorities.
Rehabilitation of over-indebted individuals and families
31. Despite the preventive measures that have already been taken by some member states in order to avoid over-indebtedness of their individuals and families, some still find themselves unable to pay their debts within the foreseeable future. Evidently, it is not possible to eradicate over-indebtedness completely, at least not without unnecessarily curbing access to credit. This is especially true because many debtors become over-indebted for reasons which are not of their own making and which they could not have reasonably predicted. Over-indebted individuals and families should therefore have effective access to impartial advice and debt adjustment procedures, for which clear criteria should be established. The effectiveness of access to such procedures implies not only that they should be free of charge (or low cost) and impartial, but also easily accessible on a physical level.
32. A specific debt adjustment procedure often results in the adoption of a payment plan that is approved with respect to the debtor in question. A payment plan should contain the amount that the debtor is obliged to pay periodically to his/her creditors, as well as the reasonable time-frame within which these payments should be completed20. What may be considered “reasonable” may vary from one member State to another and that is why the reference to national practices is included in the Recommendation. Any payment plan, approved as the result of a debt adjustment procedure, should ensure that amounts of payment as well as the entire duration of the plan do not deprive the debtor and/or his/her family of the ability to satisfy their basic needs with due regard to their human dignity.
33. Debt adjustment should cover all debts, excluding only those debts covered by special waivers provided under national law21.
34. In most member states disputes related to credit relationships in general and debt problems in particular are resolved by judicial and extra-juridical bodies with relevant competence. The increasing problem of over-indebtedness in Europe makes it necessary to find alternative solutions, where possible, for solving debt problems. Member states should establish mechanisms encouraging extra-judicial settlements between the debtor and creditor in order to find easier, faster and cheaper solutions and to avoid an increased case-load for the courts with a view to preserving court proceedings as a last resort in case voluntary debt settlement fails.
35. In certain cases creditors may, willingly or unintentionally, hinder conclusion of debt settlements between debtors and other creditors. The authorities should seek to limit such impediments when they are created unreasonably. What may be considered “unreasonable” may vary from one member State to another. To this end a competent body could be entitled to impose a debt settlement when no legitimate reason is provided by the creditor for refusing to respond to the proposed debt settlement or to carry out other measures that would encourage creditors to accept extra-judicial settlements22.
36. Over-indebtedness may, and sometimes does, result in exclusion of individuals and families from society including a loss of motivation to be engaged in income-generating activities, exclusion from social activities and health problems. This is not only detrimental to the individuals and families concerned, but also to society as a whole as it suffers evident financial loss23. That is why one of the paramount objectives of rehabilitation should be social and financial inclusion of over-indebted individuals and families.
37. One of the aspects of social and financial inclusion is encouraging active participation of the over-indebted in debt settlement as well as professional counselling and advice once the debt settlement is in force as well as upon its completion where necessary.
38. Total or partial discharge of debts can be a useful solution in cases of over-indebtedness where other measures have proved ineffective. In some cases it may be the result of the successful fulfilment of debt adjustment plans, in other cases discharge of debts can be used as an independent solution. In all cases discharge of debts should be accompanied by measures aimed at preventing repetitive over-indebtedness bearing in mind the specific reasons which lead to the over-indebtedness in each case. When considering total or partial discharge of debts due regard should be paid to the fact that all debts should be included, with the exception of those covered by special waivers provided under national law.
Implementation of the Recommendation
39. There are a number of strategic policy decisions that the authorities should consider taking with a view to facilitating the implementation of this Recommendation. Member states should ensure that all policy decisions relating to debt management and treatment of over-indebted individuals and families are uniform and conform to an established country-wide standard, with a view to guaranteeing their equal treatment.
40. In order to tackle the problem of over-indebtedness in the most effective and efficient manner, it is important to set up competent bodies involved in prevention of over-indebtedness, alleviation of the effects of the recovery of debts and rehabilitation of over-indebted individuals and families and to ensure effective co-operation between them. Along with the mainstream solutions, proposed in the Recommendation, alternative debt mediation could be considered.
41. The services of the competent bodies could be financed not only by public sector, but also by lending institutions, without prejudice to the impartiality of these services. As banks and lending institutions are key actors in a credit market, their participation is essential in setting up and implementing national policies for debt management, without excluding the participation of other creditors.
42. Public or private professionals24 with competence in issues of over-indebtedness could significantly contribute to prevention of over-indebtedness, alleviation of the effects of the recovery of debts and rehabilitation of the over-indebted individuals and families. It is important however that quality of all services related to over-indebtedness and the impartiality of their providers are ensured, including by means of special certification by the relevant state authority.
43. States should promote awareness in relation to financial management. However, information on consumers’ rights, if exposed in a purely legal language, might be difficult to understand fully for persons of average legal and financial literacy. Therefore such information should not only be easily accessible, but also be presented in a user-friendly and easily understandable language.
Note 1 This document has been classified restricted at the date of issue. It was declassified at the 999bis meeting of the Ministers’ Deputies (20 June 2007) (see CM/Del/Dec(2007)999bis/10.3).
Note 2 Brussels Convention on Jurisdiction and the Enforcement of Judgments in Civil and Commercial Matters, replaced later by the EU Council Regulation (EC) No. 44/2001.
Note 3 European Union Convention on Insolvency Proceedings, and EU Council regulation (EC) No. 1346/2000.
Note 4 EU Council Directive for the approximation of the laws, regulations and administrative provisions of the member states concerning consumer credit (87/102/EEC).
Note 5 Both contained in the Revised Proposal for the Consumer Credit Directive (COM (2004) 747 final), presented by the European Commission on 28 October 2004.
Note 6 Council of Europe Convention for the Protection of Individuals with regard to Automatic Processing of Personal Data (ETS No. 108).
Note 7 Article 6 of the European Convention for the Protection of Human Rights and Fundamental Freedoms (ECHR) requires a sufficiently efficient system for the enforcement of judgments as integral part of a broader concept of access to justice.
Note 8 Recommendation Rec(2003)17 of the Committee of Ministers to member states on enforcement, adopted on 9 September 2003.
Note 9 European Convention on Certain International Aspects of Bankruptcy, (ETS No. 136), opened for signature in 1990. Although it has not yet entered into force, it did have an important influence on the development of the European Union law.
11 The Report on Legal Solutions to Debt Problems in Credit Societies, prepared by Johanna Niemi-Kiesiläinen and Ann-Sofie Henrikson, provides three statistical methods of defining over-indebtedness: administrative, objective or quantitative and subjective. However, the authors note that all these methods have significant shortcomings, making it impossible to obtain a complete picture of over-indebtedness by using any one of them.
Note 12 Guidance can be gained for example from the European Union EU-SILC programme (Survey on income and living conditions) which is operated by Eurostat – one of the Directorates-General of the European Commission providing the European Union with a high-quality statistical information service.
Note 13 The term “impartial” should, at the very least, take into account situations where a conflict of interests may occur such as when the institution that provides the service acts at the same time as a creditor of the person who seeks advice.
14 For details as to the concept of misleading advertising, see EU Council Directive 84/450/EEC of 10 September 1984 relating to the approximation of the laws, regulations and administrative provisions of the Member States concerning misleading advertising.
Note 15 Guidance can be gained from Recommendation Rec (2003) 17 on enforcement.
Note 16 Human dignity constitutes an essential value to be upheld according to the Convention on Human Rights and Biomedicine (ETS No. 164) and its Explanatory Report.
Note 17 See the Final Declaration of the Second Summit of the Heads of State and Government of the Council of Europe, held in Strasbourg on 10-11 October 1997.
Note 18 See case of Bäck v. Finland, European Court of Human Rights, Judgment of 20 July, 2004.
Note 19 See the EU Council Directive 2002/65/EC of 23 September 2002 concerning distance marketing of consumer financial services.
Note 20 See page 29 of the Report on Legal Solutions to Debt Problems in Credit Societies, op. cit.
Note 21 According to the Report, some states exclude maintenance payments from discharge of debts. Other states exclude taxes and fines (for example criminal and administrative penalties), payable to the state from the discharge. Quite a few states exclude educational loans from the discharge.
Note 22 For example giving priority to paying the costs of a court procedure out of the available assets, above the payments to creditors.
Note 23 The financial loss caused by over-indebtedness to society includes, inter alia, social security expenses, tax loss due to unemployment of the over-indebted, medical costs, accommodation of evictees, low recovery rates of creditors, the loss of members who could potentially contribute to the economy and overall well-being of society.
Note 24 For example, judges, mediators, lawyers, specialised NGOs.